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Our Bankruptcy Blog

How Bankruptcy Affects Different Types of Debt: Student Loans, Credit Cards, and More

Bankruptcy is a legal process that individuals or businesses undertake to address unmanageable debt.

The journey through bankruptcy is not straightforward and varies significantly depending on the type of debt involved.

Understanding how bankruptcy impacts different kinds of debt, such as student loans, credit cards, mortgages, and personal loans, is crucial for anyone considering this financial step.

 

Credit Card Debt

Credit card debt is perhaps the most common reason people file for bankruptcy. Generally classified as unsecured debt, credit cards don’t tie to any physical asset like a house or car.

In bankruptcy, unsecured debts often receive the most significant relief. Under Chapter 7 bankruptcy, most credit card debts can be discharged, meaning they are wiped out, giving the filer a fresh start.

However, Chapter 13 bankruptcy reorganizes these debts, requiring repayment through a court-mandated plan, often with more favorable terms for the debtor.

 

Student Loans

Student loans represent a more complicated case in bankruptcy proceedings. Unlike credit card debt, student loans are not easily dischargeable.

Under current laws, discharging student loans in bankruptcy requires proving “undue hardship,” a condition that is notoriously difficult to demonstrate.

This typically involves showing that you cannot maintain a minimal standard of living while paying the debt, the situation will persist for a significant part of the repayment period, and that you’ve made good faith efforts to repay the loans.

Although challenging, it’s not impossible, and recent legal cases have seen some shifts in how courts interpret undue hardship.

 

Mortgages

Mortgages are secured debts, meaning they are tied to a physical asset – your home. In Chapter 7 bankruptcy, if you are behind on mortgage payments, you might still lose your home because bankruptcy doesn’t automatically eliminate the right of mortgage holders to foreclose.

However, if you are current on your payments, you may keep your home by continuing to make payments.

Chapter 13 offers more protection for homeowners. It allows debtors to catch up on overdue payments over time and can sometimes strip off wholly unsecured junior liens (like some second or third mortgages).

 

Man in bankruptcy figuring out asset protection

 

Personal Loans

Personal loans, like credit card debts, are often unsecured unless they are tied to a specific asset as collateral. In Chapter 7 bankruptcy, unsecured personal loans can typically be discharged.

In a Chapter 13 bankruptcy, these debts are part of the repayment plan, and the amount paid depends on your income, expenses, and nonexempt assets.

If the personal loan is secured and you want to keep the collateral (like a car), you must continue making payments or pay the creditor the value of the collateral.

 

Auto Loans

Auto loans are secured debts, with the vehicle serving as collateral. In Chapter 7 bankruptcy, you can choose to surrender the vehicle, discharge the debt, and eliminate the obligation.

Alternatively, you can keep the car by “reaffirming” the debt, meaning you agree to continue paying under the original terms, or by redeeming the vehicle, which involves paying its current value in a lump sum.

In Chapter 13, debtors can keep their vehicles by continuing regular payments or through a cramdown, where the loan amount may be reduced to the vehicle’s current value if the loan is older than 910 days.

 

Medical Bills

Medical bills are a significant cause of bankruptcy in the United States. These are typically considered unsecured debt, similar to credit card debt.

In Chapter 7 bankruptcy, medical debts can be discharged.

In Chapter 13 bankruptcy, these debts are included in the repayment plan, often at a reduced amount.

 

Tax Debts

Certain tax debts can be discharged in bankruptcy, but the rules are complex. Generally, income taxes may be dischargeable in Chapter 7 if they are over three years old, you filed a tax return for the debt at least two years before filing for bankruptcy, and the tax was assessed at least 240 days before filing.

In Chapter 13, tax debts are included in the repayment plan, and some penalties may be waived.

 

Conclusion

Bankruptcy offers a lifeline for those drowning in debt, but it’s not a one-size-fits-all solution. The way bankruptcy affects different types of debt varies.

It’s essential to understand these differences and seek professional advice to navigate the complexities of bankruptcy law.

Remember, bankruptcy is a tool to help you regain financial stability, not an end in itself. With careful planning and responsible financial management post-bankruptcy, it’s possible to recover and rebuild a stronger financial foundation.

 

Where Can I Find Help?

Dealing with bankruptcy doesn’t have to be a single-person job. The bankruptcy lawyers at Parker & DuFresne will help you determine the best course of action to help you get out from under your debt and move forward to a debt-free future.

Call today at 904-733-7766 for a free consultation, or click the button at the top of the page to schedule online.

 

Florida Bankruptcy Lawyers

Parker and DuFresne

Parker and DuFresne
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